It is just a mindless phrase to acknowledge that you are there and an apology if they disturb whatever you are doing,For example you are reading or in a library and someone has to pass you and they say excuse me as they pass, It doesn´t require any verbal response other than a nod or a smile and the same in many other situations.

Saying I will live could be considered rude but then it depends how it is delivered.

Either say "that's OK," or say nothing. The polite thing is to pretend that you didn't notice.

If you say "that's OK" you just say it in a quick, uninterested tone. You don't to start a conversation, you don't want them to reply to you.

Saying too much can be considered rude, and tells them that you haven't "excused them" at all...  

People say "excuse me" and "sorry" to you for possibly causing you inconvenience.  They are attempting to "wipe the slate" clean before possibly offending you.  It is meant to be very polite, thoughtful and respectful.   I think it is important not to discourage another's show of respect to you.  Let me rephrase that.  I think it is important to encourage other's show of respect towards you. This encourages them to continue showing respect towards others (a very good thing!).

The least for you to do:  Say nothing.  They will assume you accepted.    

Other possibilities that show you accepted their respectfulness:  "Sure", "No Problem".  or a "uh Hum" (the one that goes with a brief head nod).  

Nothing else is needed.   :)

Here in Hungary it's common to say the local equivalent of it. For example, on a crowded bus someone is trying to get off but the exit is blocked, he would say "excuse me" (or "elnézést (kérek)") to ask the rest of the passengers to let him off the bus. The appropriate way to respond is basically just to let him off the bus, but if one wants to be a true role model, "tessék (hölgyem/uram)" ( = here / there you go, miss/sir) is perfectly normal. Another common reaction of the blocking person is to say "sorry" for blocking the path. However since the use of headphones in public is also very common, some people are just nodding or sending a polite response using body language out of pure reflex.

I've never been to the US, however the country keeps close cultural relations with a lot of European countries, i think it's safe to assume this reaction could be considered "normal" over there too.